Monday, November 9, 2009

Will Buffet electrify the BNSF? Part I

(part 1 in a series)

So, the Oracle of Omaha, the esteemed Warren Buffett, bought the Burlington Northern Santa Fe Railroad (BNSF). He's given several reasons why he made the deal (from liking to bet on the future of the American economy to not having a train set as a boy but there is probably no singular reason other than the fact that he thought the BNSF was a well-run corporation which would give solid, if not stellar, returns for the long term.

And he's probably right. Left for dead in the 1970s in an era of disinvestment and mismanagement (when railroads like the Milwaukee Road abandoned transcontinental routes even as they were likely making money; we'll get to the the Milwaukee Road later), and with trucks taking larger shares of the marketplace, freight railroads have come roaring back in the last 30 years. Efficiencies have improved, some branch lines have been jettisoned (in order to focus on the steadier, long-haul traffic) and deregulation allowed for more profitability. And while Conrail was formed on the east coast in 1976 out of several bankrupt railroads, it's since been reprivatized, and the US is the only major country which has not nationalized its railroads.

Energy also comes in to the picture. The environmental skeptics say that Buffet is betting on coal having an increasing role in the American economy—and freight rail is the only way to move coal. (The New Yorker had a great two-part article about coal transport a few years back. (It's firewalled, though.) But, coal originates in the Powder River Basin in Wyoming, which is not near anything, and has to be shipped east (generally), and trains are the only way to feasibly do this. The other side of the coin is that Buffet may be betting on higher oil prices, which make freight rail even more economical than highway trucking. And that would likely be good for the environment.

It's pretty likely that Buffet made a good, long-term investment. The question is how much he will invest in the company. Like most publicly-traded firms, the BNSF had quarterly reports and a board of directors and, even though they are nearing completion of a double-tracking of their Southern Transcon (the old ATSF route of the SuperChief and the freight hotshot Super C which was scheduled from LA to Chicago in 40 hours), such restrictions likely wouldn't have resulted in significantly higher capital outlays. Now, however, with Buffet aboard, there's a chance they might take a bigger capital bite: electrification.

With electrification, it turns out that there is much more to it than meets the eye. I was originally going to write one post here but started taking notes and it became unwieldy. So, I'll break it down in to the following mini-posts (some of which might not be that mini) and link them each as I post them:

I. We've discussed how being part of a larger organization like Berkshire Hathaway may allow the BNSF to spend more freely on capital improvements in this section.
II. We'll then look at a history of freight rail electrification, including the sad tale of the Milwaukee Road (who de-electrified with about the worst timing possible, ever) and some freight rail electrification abroad.
III. We'll look at some of the operational advantages of electric power, and
IV. Some of the economic advantages, in the long run, of electric power generation, and how the whole system would be built.
V. From an environmental standpoint, we'll look in to how electricity can be generated on-route, and whether there are options beyond coal (such as wind and solar), and
VI. How this may mesh with the construction of a smart grid.
VII. Finally, we'll see if freight rail electrification may have any benefits for passenger rail, on the BNSF routes and other main lines.

Will we answer the question of whether Buffet should electrify freight rail be answered? Of course not. But it is an interesting question to ponder.

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